Figure 2 ECN Trading of On-the-Run Treasury
Securities, 2005:Q3 Market Share BrokerTec 61% eSpeed 39% SOURCE: Federal Reserve Bank of New York primary dealer data, eSpeed and ICAP 2005 financials, and author's estimates.
An important way that dealers hedge such positions is by short selling an on-the-run Treasury security with a similar maturity.
If a purchaser for the original security does not arrive the next day, the dealer will repo the security out again and, using the funds obtained from the repo, reverse in the on-the-run Treasury again (see Chart 5).
An off-the-run Treasury, even though it may be identical in terms of maturity and cash flow to an on-the-run Treasury
, is traded less frequently and therefore has lower market liquidity.
On-the-run Treasury coupon securities frequently trade on special because coupon securities are often shorted for hedging or speculative purposes and because on-the-run securities are the most liquid.
Changes in the premium accruing to on-the-run Treasury securities lead to a divergence in performance between these and other fixed-income securities, making Treasuries a poorer hedge and their yield a poorer reference rate.
See also Wall Street Journal (1999a), which describes changes in market practices that followed the appearance of a substantial liquidity premium in on-the-run Treasury
securities in the fall of 1998.
Because of the remarkable liquidity of on-the-run Treasury
securities, some investors are willing to pay a premium for (that is, accept a lower yield for) those securities compared with similar, off-the-run securities.
TSY~ denote the FNMA and on-the-run Treasury
discount functions, respectively.
The evidence suggests, however, that the cost of borrowing on-the-run Treasury
securities increased only briefly during the fall 1998 crisis and that repo market activity generally did not decline either during or after fall 1998.
The government securities market spans a wide range of securities, from the extremely liquid, so-called on-the-run Treasury
securities, for which bid-asked spreads are razor-thin, to the more exotic and sometimes tailor-made hybrids and derivatives, for which a fair markup could be sizable.
The Yield Book's on-the-run treasury
yield curve allows for intra-day pricing updates when used in conjunction with its matrix pricing tools.